Political India: Engaging America

From The Hindu

The Independent Evaluation Group (IEG) has said that World Bank financing to developing countries during the global economic downturn had a “positive impact” on how these countries dealt with the crisis. The IEG is an independent body reporting to the Board of Executive Directors of the World Bank rather than Bank management.

Vinod Thomas, Director-General of the IEG, said that while many developed countries posted post-crisis growth of about 4 per cent, middle income countries recorded close to 8 per cent, and developing countries as a whole 6 per cent.

Touching upon the effect of World Bank finance in India in particular, Mr. Thomas told The Hindu that “India was one of the moderately-affected countries… At the same time, India was a major recipient of Bank resources in the crisis response, using both the International Bank for Reconstruction and Development (IBRD) and International Development Association (IDA) resources.” The IBRD is the middle-income country financing arm for the Bank and the IDA is the Bank's funding arm for low-income countries.

In this context, the average growth rate in India declined by about 3 percentage points from 9.6 per cent in pre-crisis period to 6.5 per cent in the crisis period, Mr. Thomas noted.

In further comments to The Hindu, Ismail Arslan, Senior Evaluation Officer with IEG, said that in its response to the downturn the World Bank had adapted its 2009-12 India strategy towards intensified programme delivery, “with India becoming the largest single borrower from both the IBRD and the IDA in 2009-10.”

He added that the macro-policy response of the authorities was broad-based, including increases in rupee and foreign exchange liquidity, fiscal stimulus, and actions on trade and finance. Given this response, the fiscal deficit deteriorated in fiscal 2008-09, reaching 9.6 per cent of gross domestic product (GDP), Mr. Arslan noted.

Regarding future economic conditions globally, Mr. Thomas said, “With continued global uncertainty and tougher challenges going forward, sustaining performance and getting stronger results on the ground are crucial tasks in India and some of the other middle-income countries.”

He cautioned in particular that IEG evaluations indicated “more difficult macroeconomic situation… stubborn unemployment levels and poverty, and a climate and environmental crisis in the making.”

Yet the positive effect of the crisis-responsive funding bode well for the World Bank's future role, Mr. Thomas said. “This kind of support is a major force in supporting and shoring up the stabilisation of growth. This is a different role, a new role. It's something to be reckoned with,” he said.

Labels: economic downturn, recession, World Bank

From The Hindu

President Barack Obama finally made sweeping reform of Wall Street institutions a reality on Wednesday, by signing into law the Dodd-Frank Wall Street Reform and Consumer Protection Act.

In a celebrity-laden ceremony Mr. Obama said “Ultimately, there is no dividing line between Main Street and Wall Street... So these reforms will help lift our economy and lead all of us to a stronger, more prosperous future, and I am honoured to sign them into law.”

As chairmen of the committees shaping and driving the Bill forward through Congress Representative Barney Frank and Senator Chris Dodd received praise from President Obama for working “day and night to bring about reform.”

Others present included Senate Majority Leader Harry Reid, Speaker of the House Nancy Pelosi, Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke and numerous dignitaries from the government and from industry and consumer protection groups.

Explaining why America needed this reform package desperately Mr. Obama said it would help crack down on abusive practices in the mortgage industry, provide students taking out college loans with clear and concise information about their obligations and supply more information to ordinary investors about the costs and risks of mutual funds and other investment products.

Mr. Obama said, “All told, these reforms represent the strongest consumer financial protections in history. And these protections will be enforced by a new consumer watchdog with just one job: looking out for people — not big banks, not lenders, not investment houses — in the financial system.”

However seeking to dispel any notion that the financial services industry would be impeded by the reform he said, “The financial industry is central to our nation’s ability to grow, prosper, compete, and innovate... This reform will help foster innovation, not hamper it.” Yet he emphasised that the overhauls proposed in the Dodd-Frank Act were designed to ensure that everyone followed the same set of rules and firms could compete on price and quality, not “tricks and traps.”

The President also highlighted the structural reforms that would be game-changing and create greater accountability on Wall Street: “Reform will also rein in the abuse and excess that nearly brought down our financial system. It will finally bring transparency to the kinds of complex, risky transactions that helped trigger the financial crisis. And shareholders will also have a greater say on the pay of CEOs and other executives, so that they can reward success instead of failure.”

Most importantly, he added, the new laws would ensure that the American people “will never again be asked to foot the bill for Wall Street’s mistakes... There will be no more taxpayer-funded bailouts. Period.”

In closing Mr. Obama stressed that there was still much work to be done, because for these new rules to be effective, regulators would have to be vigilant and adjustments may be required the U.S. financial system adapted to these changes.

Labels: Barack Obama, financial overhaul, recession, Wall Street reforms

From The Hindu

President Obama and Senate Democrats secured an important election-year victory on Thursday with the passage of a filibuster-proof bill on sweeping reform for financial regulation.

After losing a similar vote on Wednesday, the bill managed to pass with the required 60 votes after the newest Republican to join the Senate, Scott Brown, voted across the aisle. Arlen Specter, who earlier this week lost in the Arkansas primary also added to the ranks of the bill’s supporters. The final passage of the bill is now virtually a certainty, after which it will have to be reconciled with the House version.

Hailing vote as a victory for “reform that will protect consumers, protect our economy, and hold Wall Street accountable,” Mr. Obama said it had won Senate approval despite the financial industry repeatedly attempting to kill the reform with “hordes of lobbyists and millions of dollars in ads”. When they could not kill it, they tried to water it down with special interest loopholes and carve-outs aimed at undermining real change, he added.

One of the most powerful curbs on the unrestrained power of banks coming out of this reform will be the “Volcker rule”, which restricts banks’ proprietary trading and investment in hedge funds and private equity. Also of major concern to financial lobbies has been a provision prohibiting deposit-taking institutions from trading credit-default swaps, interest-rate swaps and similar derivatives. This dimension of the reform aims to set up a firewall between retain and commercial banking on the one hand and the highly speculative trading and investment banking activities on the other.

Consumer protection

Touching on some of the key proposals of the reform Mr. Obama said the bill would create the “strongest consumer protections in history”. He said the new rules would crack down on predatory practices and unscrupulous mortgage lenders and enforce a new credit card law banning unfair rate hikes and overdraft fees and exorbitantly priced college loans.

The President also said the American people would never again be asked to foot the bill for Wall Street's mistakes. “There will be no more taxpayer-funded bailouts – period,” he said, noting that his administration had the tools to wind down failing financial institutions without endangering the broader economy.

Finally he also described the bill’s aim to bring about a fundamental restructuring of the corporate governance structure of financial institutions, making them more transparent and accountable. Mr. Obama said that complex, backroom deals that helped trigger the financial crisis would be “brought to the light of day” and shareholders would henceforth have greater say on the pay of CEOs and other executives.

Impact on Wall Street

Yet Mr. Obama was also careful to underplay the negative impact on Wall Street, arguing, “Our goal is not to punish the banks, but to protect the larger economy and the American people from the kind of upheavals that we’ve seen in the past few years.”

He emphasised that this was not a “zero-sum game where Wall Street loses and Main Street wins”, rather a recognition of the imperative that those in Wall Street boardrooms and on trading floors be held accountable for the decisions that they make.

Speaking after the cloture vote Senate Majority Leader Harry Reid said the bill had a message for both Wall Street and Main Street. He explained, “To Wall Street, it says: no longer can you recklessly gamble away other people’s money. It says the days of ‘too big to fail’ are behind us. It says to those who game the system: the game is over.”

Mr. Reid added, “To Main Street, this bill says: you no longer have to fear that your savings, your retirement or your home are at the mercy of greedy gamblers in big banks.”

Labels: economic reforms, recession, Wall Street Bill

Labels: Bureau of Labour Statistics, jobs, recession, U.S. economy

From The Hindu

President Barack Obama today announced a new multi-pronged policy to reduce the United States’ dependence on oil consumption and create new jobs after the worst recession in a generation.

Speaking at a training facility at Savannah Technical College, Georgia, Mr. Obama described the policy, called HOMESTAR, as aiming to create jobs by encouraging American families to invest in energy-saving home improvements.

After identifying building supplies and systems that would save energy over time, Mr. Obama said, the scheme would make any homeowner putting in new windows, replacing a heating unit or redoing a roof eligible for a rebate from the store or the contractor for 50 percent of the cost of each upgrade up to $1,500.

In this regard the scheme mirrors the Cash for Clunkers initiative launched last year, a $3 billion federal scrappage programme that created incentives for individuals to purchase more fuel-efficient vehicles.

Domestic employment would result from HOMESTAR, Mr. Obama explained, as “energy-efficient windows or insulation… are products that are almost exclusively manufactured right here in the United States of America”. It is very hard to ship windows from China, Mr. Obama quipped.

With a focus on quality retrofitting, the government will insist that contractors be certified to perform efficiency installations and independent field audits are conducted to ensure that the upgrades actually produce energy savings.

Mr. Obama’s hope is that this scheme will reduce energy use by an equivalent of the output of three coal-fired power plants per year, saving $200-$500 per year in the residential energy costs, while at the same time creating “tens of thousands” of jobs.

Touching on the importance of building up the nation’s environmentally sustainable infrastructure he said, “I'm convinced that the country that leads in clean energy is also going to be the country that leads in the global economy. And I want America to be that nation”. With 25 percent unemployment in the construction industry, demand has declined rapidly since the onset of the mortgage crisis.

Alluding to some business leaders in the construction industry who were present at the meeting, Mr. Obama said, “These are companies ready to take on new customers; they’re workers eager to do new installations and renovations; factories ready to produce new building supplies. All we’ve got to do is create the incentives to make it happen”.

This is neither a Democratic nor Republican idea but common-sense, he argued.

Labels: Barack Obama, HOMESTAR, recession, U.S. President

From The Hindu

Even as the Obama administration pushes forward with its Af-Pak and healthcare reform policies this month, joblessness in United States will increasingly dominate the attention of the President, Congress and the ordinary Americans. Unemployment may have fallen marginally in November after touching a 26-year high of 10.2 per cent in the month before, but the Federal Reserve has projected that even with positive economic growth it will hover around 8.3-8.7 per cent during 2010. Over the coming months, President Obama will worry that four states that are all Democratic bastions — Michigan, Nevada, Rhode Island, and California — will see the highest rates of unemployment. He will have to also struggle with the limited room for manoeuvre in public finances implied by staggering levels of public debt and the overall budget deficit. Given the elevated spending commitments in the Af-Pak region and subsidies for the proposed healthcare reform, there is practically no fiscal leeway to tackle America’s jobless recovery through further stimulus-like measures.

Yet the deterioration in labour market conditions for middle-class Americans is an ominous threat to President Obama’s already-falling popularity. With the entire House of Representatives and a part of the Senate facing elections next year a decisive strategy to create jobs quickly has become imperative, even urgent. The government has a range of relatively inexpensive policies to choose from. For example, the House will soon pass a bill that may include an extension of transport-related spending, a tax credit for expanding company payrolls, and incentives for credit to small businesses. Some Senators have proposed a plan, at an estimated cost of $600 million, whereby the government could share employers’ labour costs temporarily in a bid to avoid layoffs. If a financial transactions tax is introduced to address the issue of excessive risk-taking by financial institutions, the additional revenue could be productively deployed via local government to create new jobs. Public services such as education would benefit from this type of support. Additionally, policies of the last one year are likely to begin producing results: literally thousands of job-creating projects financed by the $787 billion stimulus package are still in the pipeline. Even the flourish of fiscal dexterity may not, however, save President Obama from politically motivated accusations of profligacy, typically from conservative lobbies opposing big government. The President needs to hold his nerve and soldier on regardless, only ensuring that he is transparent in outlining his plans to those who stand to gain from them.

Labels: Af-Pak, economic downturn, Obama administration, recession, stimulus package, unemployment

From The Hindu

As the United States economy continues to battle recessionary conditions, recent months have seen developments that some have hailed as indicators of economic recovery. First, stock markets witnessed an unexpected rally from early March, with the Dow Jones industrial average jumping 57 per cent — however volatility has soared since the crisis began, with $6.9 trillion of U.S. shareholder value wiped out in 2008 alone. Secondly, banks that accepted taxpayer money under the Troubled Asset Relief Program, including Goldman Sachs, J.P. Morgan, Morgan Stanley, and U.S. Bancorp, repaid their debt to the federal government. Subsequently, some of them went on to make record trading profits even as commercial banking languished, most notably Goldman Sachs which made $3.44 billion in profits for the second quarter. Thirdly, the U.S. economy posted growth results that heralded, technically, the end of the recession. Supported by massive stimulus packages to banks and automobiles, the third-quarter growth rate of 3.5 per cent marked the first quarter of positive growth in more than a year.

But juxtapose these indicators of recovery with the looming symptoms of recession that remain, and optimism about a full-fledged return to pre-crisis conditions seems hollow. Unemployment in the U.S. recently climbed to 10.2 per cent and, by some predictions, will remain above 8 per cent even two years from now. After the end of the ‘cash for clunkers’ scheme aimed at boosting automobile sales, many of the large car manufacturers reported a sharp fall in sales in September. Quantitative easing by the U.S. Federal Reserve has made little difference to bank lending to customers — total consumer credit decreased at an annual rate of 6 per cent in the third quarter of 2009, according to the Fed. The International Monetary Fund predicts that economic growth in the near-term will be “sluggish, credit constrained, and, for quite some time, jobless.” There is general agreement that the signs of what looks like a recovery are driven by the massive fiscal stimuli supplied. There is even a risk that these signs will encourage conservative lobbies to press for rolling back fiscal deficits. Such misguided efforts must be resisted if the current low ebb of economic activity is to revive. A premature 1930s-style rollback runs contrary to the need for even higher levels of spending on public infrastructure and social services, vital to individuals and households who will remain in the vice-like grip of housing foreclosures and job losses for years to come. President Obama cannot afford to be fearful of deficits.

Labels: cash for clunkers, deficit, Dow Jones, Goldman Sachs, IMF, J.P. Morgan, Morgan Stanley, quantitative easing, recession, recovery, stimulus package, TARP, U.S.